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April 2013 ISM Manufacturing Survey Again Less Good, But Still Shows Expansion

The ISM Manufacturing survey for April 2013 continued in expansion territory for the fifth month in a row – however, the rate of growth declined . The New Orders sub-index which historically correlates to the economy expansion strengthened.

The ISM Manufacturing survey index (PMI) fell from 51.3 to 50.7 (50 separates manufacturing contraction and expansion). This was within expectations which were between 49.5 and 51.0.

This index has been in a general downtrend since mid 2011 – and the January data was suggesting the downward trend is ending. As this is the third month of decline, the trend is “less good”.

Relatively deep penetration of this index below 50 has normally resulted in a recession.

The noisy Backlog of Orders rose – from 51.0 to 53.0. Backlog growth is an indicator of improving conditions; a number below 50 indicates contraction. Backlog accuracy does not have a high correlation against actual data.

Economic activity in the manufacturing sector expanded in April for the fifth consecutive month, and the overall economy grew for the 47th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business®.

The report was issued today by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. “The PMI™ registered 50.7 percent, a decrease of 0.6 percentage point from March’s reading of 51.3 percent, indicating expansion in manufacturing for the fifth consecutive month, but at the lowest rate of the year. The New Orders Index increased in April by 0.9 percentage point to 52.3 percent, and the Production Index increased by 1.3 percentage points to 53.5 percent. The Employment Index registered 50.2 percent, a decrease of 4 percentage points compared to March’s reading of 54.2 percent. The Prices Index registered 50 percent, decreasing 4.5 percentage points from March, indicating that overall raw materials prices remained unchanged from last month. Comments from the panel indicate a range of strong/steady growth, to flat/declining volumes, depending upon the particular industry.”

It is interesting to note that ISM Manufacturing represents less than 10% of USA employment, and approximately 20% of the business economy. Historically, it could be argued that the production portion of ISM Manufacturing leads the Fed’s Industrial Production index – however the correlation is not strong when looking at trends.

New orders have direct economic consequences. Expanding new orders is a relatively reliable sign a recession is NOT imminent. However, New Orders contraction have given false recession warnings twice since 2000. This subindex is in a long term downtrend – and remains close to contraction.

However, holding this and other survey’s Econintersect follows accountable for their predictions, the following graph compares the hard data from Industrial Products manufacturing subindex (dark blue bar) and US Census manufacturing shipments (lighter blue bar) to the ISM Manufacturing Survey (pink bar).

Comparing Surveys to Hard Data

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Caveats on the use of ISM Manufacturing Index:

This is a survey, a quantification of opinion – not facts and data. However, as pointed out above, certain elements of this survey have good to excellent correlation to the economy. Surveys lead hard data by weeks to months, and can provide early insight into changing conditions.

Many use ISM manufacturing for guidance in estimating manufacturing employment growth. Econintersect has run correlation coefficients for the ISM manufacturing employment and the BLS manufacturing employment data series above going back to 1988, using quarterly data. The coincident correlations are actually negative, but poor (r = -0.2 to -0.4 for various time periods examined). See here for definitions.

Before 2000 the ISM employment data had a weak positive correlation to the BLS data 4 to 7 quarters later (r values above 0.6). Since 2000 the correlations for ISM manufacturing employment as a leading indicator for the BLS manufacturing employment have been between 0 and 0.3 for r (correlation coefficient). These values define correlations as none to poor.

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